ONTARIO – In a claim by a trustee under s.96 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”) to recover the fruits of fraud committed by corporate officers before bankruptcy, the common law doctrine of corporate attribution was inapplicable, and the fruits of the fraud were disgorged from the fraudsters.
Ernst & Young Inc. v. Aquino
2022 ONCA 202 March 10, 2022
Ontario Court of Appeal (Lauwers, Coroza and Sossin JJ.A.)
This case concerned appeals to the ONCA from the decision of B. Dietrich J. in seven related actions arising from the fraud of corporate officers of Bondfield, and Forma-Con in a false invoicing scheme, which netted the fraudsters $ 33,174,583. Justice Dietrich directed the corporate officers, including, John Aquino to repay the fruits of their fraud. ONCA unanimously dismissed the appeals.
The Applicants were the Bankruptcy Trustee and court-appointed monitors of the defrauded corporations. Aquino and the other fraudsters did not deny that they received the money.
However, the fraudsters boldly asserted that at the time they took the money, both companies were financially strong and healthy enough to sustain the frauds. They claimed that this establishes that they did not intend to defeat any actual creditors. They also argued that Aquino’s intent cannot be imputed to either Bondfield, or Forma-Con so that s. 96(1)(b)(ii)(B) of the BIA cannot be used to require them to repay what they took: para. 2.
The appellants argued that the application judge erred because Aquino’s fraudulent intent cannot be imputed to Bondfield or Forma-Con, as a matter of law, even though he was one of their directing minds. They assert that the binding principles of the common law doctrine of corporate attribution set out in Canadian Dredge & Dock Co. v. The Queen 1985 CanLII 32 (SCC) do not permit the imputation of his intention to either defrauded company.
Accordingly, the Appellants argued that s. 96(1)(b)(ii)(B) of the BIA cannot be used to require Aquino, or the other fraudsters as “privies” to the impugned transactions, to repay the money they took: para, 51.
Lauwers JA noted that this argument raised a thorny question about the interplay between the provisions of the BIA and common law doctrine. When can common law doctrine be engaged by the court in construing and applying the BIA?: para. 52.
The ONCA provided the following context on the applicability of the doctrine of corporate attribution: paras. 66-67 (footnotes omitted)
| Corporations are not natural persons. In view of separate corporate personality, it is no small thing to impute to a corporation the intention of its “directing mind”. On the other hand, there is the spectre that corporations might commit criminal acts and civil delicts with impunity because these engage mental elements relevant to intentions. The corporate attribution doctrine creates a bridge between the corporation and the natural person whose “directing mind” caused the corporation to act as it did. The doctrine attributes the intent of the corporation’s directing mind to the corporation itself, whose conduct is then evaluated against the legal standard that applies to the implicated criminal or civil area of law.
 The Supreme Court’s current substantive teaching on the doctrine of corporate attribution is found in Deloitte & Touche v. Livent Inc. (Receiver of), which contextualizes Canadian Dredge. In Livent, the court restated the Canadian Dredge test:
To attribute the fraudulent acts of an employee to its corporate employer, two conditions must be met: (1) the wrongdoer must be the directing mind of the corporation; and (2) the wrongful actions of the directing mind must have been done within the scope of his or her authority; that is, his or her actions must be performed within the sector of corporate operation assigned to him. For the purposes of this analysis, an individual will cease to be a directing mind unless the action (1) was not totally in fraud of the corporation; and (2) was by design or result partly for the benefit of the corporation.
The Court of Appeal addressed four issues: para. 17.
- Did the application judge err in finding that s. 96 of the BIA could be used by the monitor and the trustee to recover the money Aquino and his associates took from Bondfield and Forma-Con?
- Are the defences of legal and equitable set-off available to Aquino and the other appellants who claim them?
- Did the application judge err in finding 664 Ontario to be part of the false invoicing scheme?
- Should the application judge have converted the applications into an action, or, if not, have required a trial on the financial position of Bondfield and Forma-Con?
The Court of Appeal concluded that Dietrich J. made no reversible errors and that no trial was required to determine the issues. All the appeals to set aside Justice Dietrich’s orders to repay the stolen funds were dismissed.
BIA s. 96 provides as follows: para. 19.
|96(1) On application by the trustee, a court may declare that a transfer at undervalue is void as against… the trustee — or order that a party to the transfer or any other person who is privy to the transfer or all of those persons, pay to the estate the difference between the value of the consideration received by the debtor and the value of the consideration given by the debtor — if
(b) the party was not dealing at arm’s length with the debtor and
(i) the transfer occurred during the period that begins on the day that is one year before the date of the initial bankruptcy event and ends on the date of the bankruptcy, or
(ii) the transfer occurred during the period that begins on the day that is five years before the date of the initial bankruptcy event and ends on the day before the day on which the period referred to in subparagraph (i) begins and
(A) the debtor was insolvent at the time of the transfer or was rendered insolvent by it, or
(B) the debtor intended to defraud, defeat, or delay a creditor. [Emphasis added.]
ONCA held that
- there are circumstances in which s. 96 will apply even though the “transfer at undervalue” occurs at a time that the debtor, in this case Bondfield and Forma-Con, is not insolvent: 20.
- the word “a creditor” in para. (B) as denoting any such creditor, not a target creditor or one necessarily known to the fraudulent debtor. It is reasonable to infer that any large enterprise in financial difficulty will have many such creditors, many of whom would not be actively known by the fraudster. 21.
- BIA s. 96 is remedial in nature, relying on Royal Bank of Canada v. North American Life Assurance Co., 1996 CanLII 219 (SCC), should be given the fair, large and liberal construction and interpretation that best ensures the attainment of their objects: 22.
- Referring to earlier ONCA decisions, BIA s. 96 is a remedy to reverse an improvident transfer that strips value from the debtor’s estate, where its conditions are met. Even though s. 96 is a ‘tool to address ‘asset stripping’ by a debtor”, a “bankruptcy trustee or CCAA monitor that seeks to impugn a transfer under that provision must nevertheless meet the requirements of the… specific words used” in the section: 25
Lauwers JA noted that to require Aquino and the fraudsters to repay the money they took, the monitor and the trustee had to prove two elements:
- That Aquino and the other fraudsters were not dealing with Bondfield and Forma-Con at arm’s length; and
- That, at the time they took the money (during the statutory review period), they “intended to defraud, defeat or delay a creditor” of the two corporations.
The first element was amply established by the evidence. This case turned on the second element: para. 26.
ONCA accepted and deferred to Justice Dietrich’s findings that:
- during the review periods both Bondfield and Forma-Con were experiencing increasing financial difficulties, to the knowledge of Aquino, who carried on with the false invoicing scheme and that he did this with the intent to defeat the companies’ creditors: 46.
- the false invoicing scheme might not have been solely motivated by an intention to defeat creditors but the monitor and the trustee only had to demonstrate that one of the motives or intentions was to defraud, defeat, or delay a creditor: para. 47
Lauwers JA considered Justice Dietrich’s holding that the doctrine of corporate attribution, referred to in the SCC decision in Canadian Dredge, supra. and in Deloitte & Touche v. Livent Inc. (Receiver of), 2017 SCC 63, paras. 100-4. should not apply to applications under BIA s.96 and Aquino’s intent to defeat creditors ought to be attributed” to Bondfield and Forma-Con: paras 53-54.
ONCA held that Dietrich J. was correct not to apply the doctrine of corporate attribution to the bankruptcy context. Lauwers JA rhetorically asked: The underlying question here is who should bear responsibility for the fraudulent acts of a company’s directing mind that are done within the scope of his or her authority – the fraudsters or the creditors? para. 78.
Lauwers JA concluded that “[p]remitting the fraudsters to get a benefit at the expense of creditors would be perverse. The way to avoid that perverse outcome is to attach the fraudulent intentions of Aquino to Bondfield and Forma-Com to achieve the social purpose of providing proper redress to creditors, which is the core aim of s. 96 of the BIA. The application judge did not err in finding that the “intention of the debtor” under s. 96 can include “the intention of individuals in control of the corporation, regardless of whether those individuals had any intent to defraud the corporation itself.”: para. 79.
ONCA also addressed other issues on the appeal, including a claim by Aquino for set off and an issue relating to the liability of one of the related corporations. All of the appeals were dismissed.
ONCA also dismissed appeal from Dietrich J.’s exercise of discretion to refuse to turn the application into an action on the basis that the evidence requiring determination of credibility were not material to the main issues in the case. Justice Dietrich’s exercise of discretion was entitled to deference: paras. 100-104